Working Paper

Perverse and virtuous feedbacks between inequality and innovation: Which role for public institutions and public investment?

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In this paper, we deal with the complex relationship connecting inequality to innovation, and the ways through which public investment, in particular public participation to R&D initiatives, may affect it. We first stress that multiple different equilibria may exist in the inequality-innovation space.

The positive link that part of the economic theory often assumes between (initially) rising inequality and improving innovation performances emerges as only one among many other far less virtuous dynamics. We then analyze the specific case of the US. We put emphasis on the possible perverse effects that the financialization of the US economy may induce on the inequality-innovation nexus. We also note that the US developmental State that is very often neglected by the economic literature may effectively mitigate such undesirable outcomes. According to our interpretation of recent developments in the US economy, the widespread belief in the positive proinnovation effects of fierce cutthroat remuneration systems may prove to be ungrounded.